In the Expert Commission on Pensions’ 2008 review of Ontario’s pension system, it recommended an agency or unit of the provincial government serve as a pension champion.

According to the commission, the pension champion’s responsibilities would include working closely with stakeholders, promoting and facilitating innovation in the pension system and leading policy development efforts in the pension field.

Read: Alberta’s DB pension funding rules fail to balance sustainability, affordability: ACPM

The concept of a pension champion on a national level is pertinent, in light of some recent developments that appear contradictory from a pension policy perspective:

  • Funding reform

In recent years, several provinces have implemented private sector pension funding reform with the objective of increasing the sustainability of defined benefit pension plans by either making solvency funding requirements less onerous or completely eliminating the requirement to fund solvency deficits.

Funding reform has also made it more feasible for pension plan sponsors to allocate a higher proportion of plan assets to riskier investments with the objective of decreasing the expected long-term cost of providing benefits. For these provinces, a deliberate policy decision was made to accept lower pension funding levels in exchange for slowing the decline of DB pension coverage in the private sector (or for those who are more optimistic, possibly even increasing coverage).

  • Bill C-228

Last month, the House of Commons passed Bill C-228, which is now under review by Canada’s senate. If it becomes law, it will give super-priority to DB pension plan members in the event of employer insolvency.

The goal of Bill C-228 is to protect the pensions of employees and retirees. While this goal is laudable, borrowing will likely become more difficult and expensive for some private sector companies that sponsor a DB pension plan, particularly those that are facing financial difficulty or on the verge of becoming insolvent. This could lead to some companies deciding to wind up their DB pension plan.

Read: Super-priority pension bill may hasten DB plan closures: expert

Bill C-228 will also likely incentivize companies that decide to maintain their DB plans to fully fund the plans and reduce investment risk in order to improve the company’s ability to borrow at an affordable rate. Regardless of whether or not one is in favour of Bill C-228, it should be clear that the potential effects of this bill becoming law contradict the key objective of pension funding reform discussed above.

  • Real return bonds

In November, the federal government announced it will immediately cease issuing real return bonds. For pension plans that are indexed to inflation, real return bonds serve to protect the plan against inflation risk.

Therefore, the shortage of real return bonds that’s expected to emerge over time will impede the ability of certain plans to reduce inflation risk. Also, in order to hedge inflation risk, insurers will often use real return bonds to back group annuity purchases for pensions that provide indexing.

Read: What do rising inflation, interest rates mean for pension de-risking?

A shortage of real return bonds may therefore increase the price of group annuity purchases for indexed pensions. An increase in annuity pricing will make it more expensive for certain plan sponsors to de-risk through a group annuity purchase and will increase the windup deficit (or reduce the windup surplus) for indexed plans.

This new development will also make it more challenging for sponsors of indexed plans to address the unintended consequences of Bill C-228, should it become law.

The challenges that exist in Canada’s pension system raise the question as to whether it would be more vibrant and coherent if there was an entity whose mandate includes advocating for the pension system, working with stakeholders and leading the development of consistent pension policy. Could a pension champion on a national level fill the current void?

Read: OECD report urging policy-makers to consider role of employers in supporting pension growth